You are the manager of a credit department. The sales team has presented a large order from a new purchaser, Wizard Industries. For approximately 12 years, Wizard has been installing security and water sprinkler systems in office buildings.

The salespeople have been well trained, as they have also presented you with the following financial statements and industry ratios (from your files). In their report they note that sales have increased in the last two years due to Wizard's more aggressive selling approach.

The sales team is eager for you to grant credit to Wizard Industries. Of course, you must do a complete analysis noting any ratios that are cause for concern or require a further explanation.

What is your recommendation? Do you grant credit?

Selected Industry ratios
Profit margin.................................................5.8%
Return on assets (investment).............................. 8.1%
Return on equity..............................................20.3%
Receivables turnover..........................................6.3 x
Average collection period....................................58.3 day
Inventory turnover.............................................4.3 x
Capital asset turnover..........................................8.0 x
Current ratio.....................................................1.6
Total asset turnover........................................... 1.7 x
Quick ratio...................................................... 1.1
Debt to total assets.............................................. 60%
Times interest earned............................................ 4.3 x
a). If you were being asked to determine whether your company should grant short-term credit to Wizard Industries, which ratios would you consider as most important?
b). Based on these ratios, would you grant short-term credit to Wizard?
c). If you were being asked to determine whether your company should grant long-term credit to Wizard Industries, which ratios would you consider as most important?
d). Based on these ratios, would you grant long-term credit to Wizard

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Wizard Industry Income Statement Year ended 2013 2015 2014 Sales (all on credit). Cost of goods sold.. $1,605,100 S1,841,300 $1,542,700 1,258,900 1,397,400 1,174,800 Gross profit.. 346,200 443,900 367,900 Selling and administrative expense... 265,650 256,850 294,200 Amortization.. 14,000 14,400 16,000 Opening profit.. 66,500 172,650 57,700 Interest expense.. 65,100 50,550 50,100 1,450 122,100 Eamings before taxes. 7,600 2,200 Тахes. 350 27,100 95,000 Eamings available to common shareholders... $1,100 5,400 S 70,000 Dividends declared.. 65,000 60,000 Wizard Industry Balance Sheet December 31, Assets 2015 2014 2013 Cash. $14,900 $24,700 $11,500 Marketable securities. 7,000 7,000 7,000 Account receivable.. 410,800 361,800 297,300 Inventory.. 256,600 330,000 289,900 Prepaid expense.. 5,200 800 5,500 Total current assets... 694,500 724,300 611,200 Net plant and equipment. 162,000 172,900 184,300 Goodwill.. 25,400 28,200 30,600 Total assets. $881,900 $925,400 $826,100 Liabilities and Shareholder's Equity Account payable.. . $145,900 $196,700 $209,700 Band loan.. 254,000 95,000 169,000 Accrued expense. 3,700 23,700 14,400 Total current liabilities. 403,600 422,400 393,100 Long term debt. 225,800 181,600 141,000 Total liabilities. 629,400 604,000 534,100 Common stock. 14,000 14,000 14,000 Retained earnings.. 238,500 307,400 278,000 Total shareholder's equity. 252,500 321,400 292,000 Total liabilities and shareholder's equity.... $881,900 $925,400 $826,100